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Industry Standard

Why Microsoft hates AOL

August 11, 1999
Web posted at: 3:08 p.m. EDT (1908 GMT)

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Who will win the war in the long-term?

Microsoft AOL
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by Alex Lash

(IDG) -- Is it a war of products or a war of words?

Microsoft's Internet strategy increasingly consists of jabs at America Online, the online service king that Microsoft has never been able to topple.

Microsoft's latest salvos are as much flares of distraction as they are well-aimed strikes in a rivalry that's rapidly growing beyond online services. With its purchase of Netscape Communications last November and a subsequent e-commerce alliance with Sun Microsystems, AOL now has an arsenal to challenge Microsoft on several Internet fronts: a high-powered server operating system, e-commerce software for businesses and consumers, and interactive software and services that could replace Windows on PCs and run an array of digital devices.

The recent instant-messaging battle and Microsoft's musings about dropping or eliminating the fee for its Internet-access service are the latest moves in a much larger battle to win over the next decade of Internet users.

In the U.S. alone, the number of adult Net users is expected to more than double to 130 million by 2003, according to market researcher Cyber Dialogue. Also by 2003, says Forrester Research, Net-driven commerce will jump from last year's $8 billion to $108 billion, while business-to-business transactions for which both Microsoft and AOL's partner Sun Microsystems want to sell the computing infrastructure will top $1.3 trillion.
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To convert Net surfers into online advertising dollars and transactions, AOL, Microsoft, Yahoo and the other online services must keep them from doing what comes naturally on the Net: jumping from site to site. Instant messaging, Net access and a myriad of other services play an important role in creating user loyalty and retaining their business.

The messaging brouhaha has garnered an overload of headlines, many of which focus on America Online's refusal to open its AOL Instant Messenger (AIM) system to the outside. It was a smart publicity move by Microsoft: casting itself as an open-standard champion and painting AOL, which is currently hammering AT&T to open its newly purchased cable empire to outside content providers, as Internet Hypocrite No. 1.

It also deflected attention away from Microsoft's own problems. Messenger, which is a crucial piece of Microsoft's strategy to draw users to Hotmail and its other Web-based services, arrived July 22, months behind schedule. After high-profile press demos last summer and talk of an autumn 1998 beta, the product dropped out of sight, as a leadership void and development turmoil distracted the company's new-media division. To add to the pressure, AOL pulled a coup with its June 1998 purchase of runaway chat software favorite ICQ.

At the time, it didn't matter if AOL couldn't or wouldn't let ICQ and AIM users communicate with each other or anyone else's chat systems. But now, with Microsoft and others turning up the heat and encouraging AOL to join an international effort to create a messaging standard, AOL is playing for time. It has recruited several industry allies, including Apple's Steve Jobs and Novell's Eric Schmidt, for an advisory committee. It has also invited the key international standards-making body to join its own effort, instead of vice versa.

Six days after debuting MSN Messenger, Microsoft said 700,000 unique accounts had been created. But with claims of 28 million registered AIM users, and 38 million more entrenched on ICQ, there's little imminent danger of mass defections to Microsoft.

But if Microsoft wasn't able to embarrass AOL into opening the instant-message gates, it's made a separate but related attack. Yesterday, musings from key Microsoft executives about offering low-cost or no-cost Internet access had the immediate effect of dropping AOL's stock nearly 10 percent. (It has since recovered.)

The investor handwringing likely made Microsoft marketers smile, but AOL has been able to fend off Microsoft time and again. Its subscriber base continues to climb and could reach 20 million by next year. MSN's ISP business has about 1.8 million subscribers, according to research firm Jupiter Communications. Microsoft no longer releases subscriber numbers and wouldn't confirm or deny the Jupiter estimate.

Of course, it's not exactly news that Microsoft wants to attract more ISP subscribers with lower prices. The company has a six-week-old campaign run jointly with retail outlets Staples and Costco to give PC buyers a $400 rebate if they commit to MSN for three years. It's also offering through Costco a $12-per-month plan as long as subscribers sign on for three months at a time. Microsoft won't release specific numbers, but Mehdi says the sign-up run rate has increased 50 percent. Like AOL, the company has also toyed with reduced rates for limited hours.

But Microsoft's top Internet executives have been claiming that the access business finally stepped out of the red about six months ago. "We turned it from losing lots of money into one that now breaks even," then-Microsoft Network chief Laura Jennings told The Standard last December. "This year we'll spend lots of money to grow the user base."

Because Microsoft doesn't itemize revenues for its various new-media holdings, it's impossible to verify such statements. But if Access is slowly but surely becoming profitable, a reduction or elimination of subscription fees could be seen as a step backward.

Not so, says new MSN marketing director Yusuf Mehdi. "Our long-term vision is to do exciting stuff on Web, and that requires a lot more people on the Web," he says. "The way to deliver value to the user and derive benefit for the company is much broader than just [Internet] access."

In other words, the more people getting to the Web through MSN, the more Microsoft can funnel them to its portal, its advertisers and its e-commerce partners. To open up a new revenue stream, the company is quietly considering taking a cut of e-commerce transactions with merchant "tenants" on MSN - up until now a Microsoft no-no.

Microsoft traditionally does best when it imagines itself to be the underdog. In the online service and messaging battles, it truly is. Initial reports say the follow-on to Windows 98, due late next year, will integrate the Internet more deeply into the operating system. That could hamper AOL's ability to reach out to new PC users. The logical path leads AOL to brand its own cheap PCs and other devices.

It's a safe bet that Microsoft will be dogging its online rival at every step.

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